OPEC has already chained two years of supply cuts, but with the end of the road closer

All the forecasts crystallized into facts on Sunday. The Organization of Petroleum Exporting Countries (OPEC) announced what everyone anticipated: that the cuts on the supply of crude oil, which began in the pandemic – with the barrel trading in negative for the first and probably only time in history – and only Briefly interrupted in the spring of 2002—with thousands of Russian barrels leaving the market—they will continue well into next year. However, the cartel itself already suggests a reversal of its restrictive policy, the only one with which it has been able to contain the price depression. A first future nod to consumer countries – the United States, Japan, India, China and the EU – after many prayers for the noose to be loosened in the midst of escalating inflation.

The new roadmap for classic oil tankers involves starting to open their hand with their offer starting in October, a few months earlier than expected by the majority of analysis houses that follow the day-to-day life of the sector. “We will maintain the same preventive and prudent approach,” said, however, the Minister of Energy of Saudi Arabia – the undisputed leader of the club – Abdulaziz bin Salmán Al Saud, after the telematic meeting on Sunday. Wait and see, yes, but with the door open to a reversal of the policy they have followed in recent times. Oil fell more than 3% this Monday, the first day in the markets since OPEC’s decision.

Crude oil is one of the markets that is least governed by the principles of free trade. Not so much because of demand, closely linked to economic growth although also influenced by electrification that is clearly increasing, but because of supply: despite the great increase in production in the US, Brazil or Guyana, the expanded version of the cartel (the OPEC+, Russia included) continues to contribute almost 60% of the crude oil that is placed every day in the global bazaar. That’s why your decision to turn the tap on or off has such an influence on prices.

The agreement reached this Sunday involves extending the cut of almost two million barrels of crude oil per day, which initially expired at the end of June. Without that agreement, today’s less than $80 per barrel would be simply unimaginable: the price would be noticeably lower. Hence why so many countries, rich and emerging, have taken months of repeated requests for the cartel to relax its restrictions.

balance game

There is a paradox, however, that the potential return of OPEC supply next year could coincide with the first significant decrease in global fuel consumption, on the back of an electrification that continues to gain ground and that has in China—by far the largest global importer of crude oil—one of its main focuses.

The poster’s balancing act is also anything but simple. On the one hand, it is tempting for their interests to close supply as much as possible without stifling demand to try to raise prices to the maximum: up to around $100, the threshold from which Riyadh balances its public accounts but at that the cartel seems to have definitively resigned.

On the other hand, they need to sell enormous quantities of oil month after month: all members of the group have fiscal energy, by far, their largest source of income. And they are increasingly aware that no small part of their reserves will end up staying underground forever and ever, the only way to stop climate change that has until now been unstoppable.

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